Slowing Mortgage Market Could Lead to Looser Lending

Back in December, the Mortgage Bankers Association said it expected refinance volume to slip to $785 billion from $1.2 trillion in 2012, while purchase money mortgage activity was slated to increase only slightly from $503 billion to $585 billion.

After all, there are only so many refinances out there, and many were originated in earlier years. Mortgage rates have pretty much idled over the past year, so the eligible pool probably hasn’t grown much.

Additionally, despite an anticipated increase in purchase activity, it’s clear that inventory constraints continue to make it difficult to purchase a home.

Cash buyers continue to control the market as well, so even if home purchases rise, lenders aren’t necessarily getting a piece of the action.

At the same time, more and more banks and lenders are positioning themselves to take part in the burgeoning mortgage market.

For example, lenders that didn’t even exist prior to the latest mortgage crisis, such as PennyMac (ex-Countrywide execs) or OneWest Bank (IndyMac’s ashes), have entered the fray, and old names, such as Nationstar and Impac, have risen from the dead.

A Slippery Slope?

This has led to criticism from housing market advocates, such as the National Association of Realtors, who have called for looser guidelines to spur lending and home sales.

But market participants will have to be careful not to repeat history in just 5-6 short years.

Sure, lenders aren’t going to return to originating no-doc loans with zero down financing overnight, but the lack of supply could tempt some to dip their toes in those waters again.

If more private capital funnels into the market and competition heats up, it’s only a matter of time before the return of Alt-A lending leads to the arrival of subprime, and then an eventual “situation.”

It will be especially interesting to see how lenders manage the expected uptick in mortgage rates.

Clearly homes will be less affordable if mortgage rates normalize just a little bit, so it’s only a matter of time before creative financing rears its ugly head again.

Let’s just hope it’s more creative, and less destructive this time around.